Sep 17, 2022 - Economy

The attraction of ESOPs

Illustration of hands reaching for a giant dollar

Illustration: Sarah Grillo/Axios

Entrepreneurs looking to sell their companies always have the option of selling to their employees — specifically to an Employee Stock Ownership Plan, or ESOP.

How it works: "Employee ownership combines the capitalist motives of profit and private ownership with a populist desire for workers to share in the wealth they help create," writes Ron Wirtz of the Minneapolis Fed, who also details "compelling" tax advantages of such schemes, most notably the ability of entrepreneurs to defer or even avoid paying capital gains taxes on the sale.

Driving the news: New York City's beloved Astor Wines has been sold to its employees in such a manner.

  • An ESOP is a form of retirement plan, and the plan's trustee was chosen not by Astor Wines founder Andy Fisher but by the employees. In turn the trustee hired an appraiser to come up with a fair price for the company; Fisher and his brother — the sellers — will be paid that price out of corporate profits over the coming years.

The big picture: ESOPs are not nearly as popular as their tax advantages might suggest — only a couple hundred are formed each year. They're complicated to set up, and often bankers don't even suggest them to founders looking to sell. When they come together, however, they can work very well.

  • What they're saying: "ESOPs have tended to perform better than their non-ESOP counterparts," Astor's Fisher tells Axios. "I am not bittersweet — I am thrilled and energized."
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